Block Trade – Yesterday’s Buyer of VIX Jan 20 Calls

Yesterday as the trading day got started I heard a shout to my right (which is the direction of the VIX pit) as a big trade came into the VIX arena. It turns out all the hubbub was about a buyer of 80,000 VIX Jan 20 Calls who paid 0.75 for 8,370 and 0.80 for 71,630 of those options. Being the day before January VIX settlement this trade was a bit of a surprise, but also got a lot of attention. Later in the day, with VIX higher, a (maybe the same?) buyer returned purchasing about 70,000 of the VIX Jan 20 Calls. This time they paid 1.05 and 1.10 for those options. The net result of these two orders was a purchase of close to 150,000 VIX Jan 20 Calls at an average price of about 0.93. I put together a 5 minute chart of VIX from yesterday and highlighted where the index was when these two orders were executed.

VIX Chart Fixed

Trade 1 is the purchase at 0.75 and 0.80 and Trade 2 is the purchase at 1.05 and 1.10. Note after the second order is done VIX also seems to be done for the day, at least to the upside. Of course that’s pretty easy to see with the rest of the day shown on the chart.

So now that January VIX contracts have gone off the board and settled at 0.97 I decided to take a look at some numbers and gain clarity into what went on here. Was this trade a one day hedge against a catastrophe in the markets? Did someone expect the State of the Union address to push equity prices lower on the open today? Was someone expecting Putin to do something last night to expand breathing space for the ever growing Russian population? I’m pretty certain the answer is no to all these questions. The answer is much less exciting than exciting than any of these assumptions…

It appears that a fund was short a large number VIX Jan 20 Calls and didn’t want to hold the position into expiration. The open interest in these options dropped from 334,000 to 193,000 overnight which is pretty close to the size of the trade.  I know that’s not exciting and there’s not much of a story to tell here. The execution probably could have been better and VIX settlement was only 0.04 higher than the cost of getting out of this position. However, I am pretty sure one fund manager slept a little better last night after getting out of that position.